CFA Study Finds No Need to Keep Taxpayers on the Hook for Billions in Terrorism Insurance Losses

Congress Urged to Allow Terrorism Risk Insurance Act to Expire

Washington, D.C. - The nation's terrorism insurance law is not
necessary to ensure the availability of affordable terrorism coverage
for most areas of the country and should be allowed to expire,
according to a major study released today by the Consumer Federation of
America. In its report, CFA found that insurance experts have set
terrorism insurance rates quite low in most of the country and that,
according to insurance risk models, private insurers will be completely
responsible for all terrorism insurance losses in all but nine large
cities by 2005.

"The insurance industry got a helping hand in the wake of 9-11 when
Congress and the President agreed to offer free terrorism reinsurance
backed by taxpayer dollars," said J. Robert Hunter, CFA's Director of
Insurance, and a former Federal Insurance Administrator and Texas
Insurance Commissioner. "Our study clearly documents that the insurance
industry is more than ready to stand on its own two feet and that
taxpayer back up should end. The ability of the industry to insure
against terrorism is enormous and growing, profits are quite
substantial and the financial condition of insurers overall is rock
solid."

In November of 2002, President Bush signed the Terrorism Risk
Insurance Act. TRIA created a three-year program in which the federal
government covers 90 percent of all terrorism-related insurance losses
(up to $100 billion a year) after individual insurance companies pay an
initial deductible. Insurers, who are required to offer terrorism
coverage, must repay very little or no assistance. The act ends on
December 31, 2005, unless renewed by Congress.

Major Findings

The CFA study, "The Terrorism Risk Insurance Act: Should It Be
Renewed?" assesses current prices for terrorism insurance and the
increasing ability of the property/casualty insurance industry to cover
terrorism losses without taxpayer back up. CFA based its analysis in
large part on a determination by the Insurance Services Office (ISO)
that the risk of terrorism in the U.S. varies geographically.

Areas with a high risk of attack are: New York City; San Francisco County; Washington, D.C., and Cook County, Illinois (Chicago);

Areas with a moderate risk
of attack are: Suffolk County, Massachusetts (Boston); King County,
Washington (Seattle); Los Angeles County; Harris County, Texas
(Houston), and Philadelphia County.

The remainder of the country is at a low risk of attack.

The report has several major conclusions:

Terrorism insurance rates are relatively low in most areas of the country and will continue to be so when TRIA expires.
This is because industry experts have concluded that most of the
country has no significant terrorism risk under TRIA. Based on data
collected by ISO, CFA estimates that terrorism insurance rates will be
extremely low without the back up provided by TRIA when this law
expires. For example, in the lowest risk areas of the country, CFA
calculates that a $10 million building with $5 million in contents
would cost only $300 to insure against terrorism once the law expires,
the same cost as in the final year of TRIA. In moderate risk areas,
this cost would only be $6,526 when TRIA expires, only $326 more than
during the last year of the program.

The private sector will be responsible for covering all terrorism losses in all but nine large cities by 2005, before TRIA back up expires. Even in those nine areas, insurers will be covering the vast majority of the risk.
This is according to the calculations of the ISO model regarding the
risk of terrorist attacks, including attacks using weapons of mass
destruction (WMD) and other catastrophic possibilities. This means that
the insurance industry should have the capacity to cover all but
perhaps the most risky areas of the country without help from
taxpayers. In the five moderate-risk cities mentioned above, private
insurers will be covering 95 percent of the risk by 2005. In the four
high risk areas of the country, insurers will be covering 70 percent of
the risk.

Commercial insurance buyers in most of the nation are reluctant to buy taxpayer backed insurance coverage.
This is because of the perception that terrorism will not impact them
and that, even at very affordable rates, the price is too high.
According to a recent survey by the Council of Insurance Agents and
Brokers, half of the commercial brokers they questioned said that only
20 percent of their clients are actually buying federally backed
terrorism insurance.

Industry experts have projected that terrorism losses to the insurance industry will be relatively modest.
ISO has projected terrorism insured losses annually to be $5.75 billion
before tax considerations. To put this projection into perspective
industry losses on 9-11 were $40 billion before tax considerations. ISO
thus projects a 9-11 level of loss just about every seven years.

Insurers are in an excellent financial position to cover all terrorism losses after TRIA expires.
The profits of insurers selling TRIA-backed terror coverage are
excellent now, as is the financial solidity of the industry. The return
on equity for four of the five top stock insurance groups exceeded a
very substantial 16 percent in 2003. These profits are expected to
remain good for some years to come, as the industry continues to
benefit from a "hard market" cycle that has kept premiums and profits
high. Overall, the property/casualty insurance industry added 22
percent to policyholder surplus in 2003 (a whopping $65 billion)
according to A.M. Best and Co. Meanwhile, financial soundness, which is
measured by the amount of surplus the industry has compared to the
coverage it has extended (net written premium), is very strong.

Public Policy Recommendations

Based
on the relatively low risk of terrorism attacks and low rates in much
of the country, as well as strong industry profitability and financial
soundness and the growing capacity of insurers to offer terrorism
coverage, CFA found no compelling reason to extend TRIA at the end of
2005. The only possible reason Congress might want to consider some
form of limited taxpayer back up after TRIA expires would be to assist
the nine cities at moderate or high risk of terror attacks.

However, if Congress considers such a plan, it should:

Consider targeting only the cities where the risk of attack is moderate or high.
In fact, it is highly unlikely that the five cities at moderate risk of
attack will need assistance, as 95 percent of all potential terrorism
losses will be covered by the insurance industry by the end of 2005.

Increase the deductibles that insurers must pay for losses in these few cities.
CFA suggests an industry-wide deductible of $50 billion after tax
considerations - a pre-tax deductible of $77 billion - for the first
year of a renewed program. This should increase by $10 billion a year
thereafter.

Increase the share of losses that insurers must pay above the deductible amount from 10 percent to 15 percent, increasing by 5 percent a year.

Only provide taxpayer back up for truly exceptional terrorist events, such as attacks with WMD, and

Ensure that taxpayers pay no costs for backing up terrorism losses.
The Treasury Department should require that insurers pay premiums for
the coverage that taxpayers are providing that are actuarially sound,
if a not a little higher than estimated taxpayer costs. Requiring
insurers to pay rates that are slightly higher than estimated will
encourage private insurance mechanisms to quickly compete by offering
lower rates.

Ensure that taxpayers
pay no costs for backing up terrorism losses. The Treasury Department
should require that insurers pay premiums for the coverage that
taxpayers are providing that are actuarially sound, if a not a little
higher than estimated taxpayer costs. Requiring insurers to pay rates
that are slightly higher than estimated will encourage private
insurance mechanisms to quickly compete by offering lower rates.

"This
law is no longer necessary because the insurance industry is more than
able to pay for most terrorism insurance losses in the future," said
Travis B. Plunkett, CFA's Legislative Director. "However, if Congress
decides to keep some form of back up, it should only target the few
areas of the country where getting affordable terrorism coverage might
be a problem. Congress should also require insurers to broaden the
amount of coverage they offer, pay for the back up that taxpayers
provide, and increase incentives for the development of a private
insurance market that can cover all terrorism losses."

CFA
is a non-profit association of 300 organizations that, since 1968, has
sought to advance the consumer interest through research, advocacy and
education.